Ahead of the Curve

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EUROPE - Pension funds are re-structuring their fixed income portfolios, and Schroders thinks this is where managers will be needed.

Robert Schlichting, head of institutional business at Schroders, told IPE: "Government bond portfolios that have been managed in-house will now be outsourced again - not to maximise returns, but to manage the country risk."

He added: "This was an asset class that was off our radar, but is now back on the table."

Günther Schiendl, CFO at the largest Austrian Pensionskasse VBV, also sees the government bond sector as "extremely difficult" due to the fact a lot of knowledge that institutional investors had - such as managing individual country risks - has been "lost".

For him, providers are currently offering "extremely unsatisfactory" solutions like index-based funds, and for the VBV, he is diversifying into corporate bonds and high yields that are close to becoming investment grade.

From talks with institutional investors, Schlichting has identified a similar trend toward BB and BBB companies where an upgrade is likely.

DirkLepelmeier, managing director at Nordrheinische Ärzteversorgung (NAEV), the pension fund for North Rhine Westphalia's medical profession, is also not keen on index products for bond exposure.

He said: "A bond means somebody is making debts, and that means, with an index, you'll always have those in the portfolio that make the most debts - and that is not something we want."

NAEV decided to diversify its bond portfolio with an absolute return bond segment in a UCITS III structure, among other things.

Within this segment, the various products consist of options-based strategies, emerging markets long/short and a broad multi-strategy approach.

The restructuring was done in-house, but for the manager search, NAEV used Mercer, Feri and alpha portfolio advisors.

Schlichting is sceptical about UCITS-tailored hedge fund strategies, as there is always the question of "what was left out to make it fit".

He added: "The use of swaps in such structures is even more alarming, as it introduces counterparty risk."

Schlichting does not expect many mandates to be tendered for equity portfolios next year.

"Many have kept their equity quotas and just hedged it - for more exposure, they will then just remove the hedge," he said.

Emerging market equities will see further inflows, but Schroders said it was very defensive regarding emerging market debt because much of it was already oversubscribed and inflows might have peaked already.

Another market trend Schlichting said he was unsure about was fiduciary management.

In German occupational pensions, he explained, labour and tax regulations are much more important factors, and asset management only comes in second place - therefore, providers have to offer holistic solutions instead of products.

And those have to be as transparent as possible, "something that has often been neglected so far", he added.

Read more on pension funds in the low interest rate environment in the IPE Institutional Investment Asset Management Guide 2010.